Study: Housing market is frothy Report calls 71 cities' homes far overpriced
By Sue Kirchhoff
USA Today
WASHINGTON -- Single-family homes in 71 U.S. cities were extremely overvalued in the first quarter of 2006 and at risk of price correction, with the costliest properties clustered in California and Florida, economists said this week.
National City Corp. and consulting firm Global Insight in a joint study said even though the rate of home price appreciation nationally has slowed in recent months, the number of extremely overvalued markets rose 11 percent from 64 cities at the end of 2005.
Overall, the study said, markets where prices were far higher than justified based on income, employment and other variables represented 39 percent of all single-family housing value in the first quarter of 2006. As recently as 2004, only three markets, representing 1 percent of home value, were considered grossly overpriced.
"Those markets that have been showing the highest appreciation rates and are most overvalued are continuing to see prices increase currently," says Jeannine Cataldi, senior economist at Global Insight.
Home price appreciation on average was fastest (10.1 percent) in the 50 most overvalued markets during the quarter and slowest (2.7 percent) in the 50 most undervalued. Still, Cataldi expects a gradual, rather than abrupt, slowdown in home price gains, though she adds that "some markets will see a more pronounced decline than others."
Naples, Fla.; Salinas, Calif.; and Port St. Lucie-Fort Pierce, Fla., were the three most overvalued markets, according to the report, while College Station, Dallas and Fort Worth, all in Texas, were the most undervalued.
The median price of $383,000 in Naples was a 102.6 percent overvaluation, for example, while College Station homes, at a median price of $94,000, were 24 percent less than the market could bear, it said.
Indianapolis was listed as 8.6 percent undervalued, with a median home price of $136,700.
Overall, 17 of the 20 most overvalued markets are in California and Florida.
Several cities, including Boston, San Francisco and San Diego, are seeing prices flatten, the study said.
The report tries to calculate statistically normal home values, or where house prices should be, by looking at factors in addition to price and interest rates, including employment, population density and historical premiums and discounts in cities over time.
The analysts looked at 317 metro areas. The report, which uses price data from the Office of Federal Housing Enterprise Oversight, considers cities 34 percent or more above normal prices to be extremely overvalued.
According to a variety of government and private data, home prices and sales are slowing from the record-setting pace of the past five years.
Economists expect further slowing ahead, especially if the Federal Reserve keeps raising interest rates.
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